EB-5: What’s all the Fuss About?

Published on August 20, 2015

by Jeff Campion

In recent months, the EB-5 Regional Center program has come under attack with allegations of misuse, fraud, and even claims that the program has been infiltrated by Iranian agents. With so much recent talk about the program in the media, I thought it would be helpful to ask why there is such a negative view of the EB-5 program.

Much of the criticism has come from members of the Republican Party. It is tempting to think of this issue as yet another partisan fight, but I, too, am a Republican and have seen how a healthy EB-5 program has benefited and will continue to benefit our country. I am not writing to criticize along party lines, but rather to outline the most recent issues posed, ask whether they are justified, and look for solutions.

The interrogation of the EB-5 program is spearheaded by Senator Chuck Grassley of Iowa, the top Republican on the Senate Judiciary Committee. Sen. Grassley sent his latest letter on EB-5 to John Sandweg, acting director of the Immigration and Customs Enforcement (ICE) arm of the Department of Homeland Security, on Dec. 12, 2013. Therein, Sen. Grassley highlighted issues raised in a recent memo by the Homeland Security Investigations (HSI) arm of ICE. In the letter, he states his alarm at documentation that appears to indicate Iranian operatives used the EB-5 program to try to obtain visas for their associates. Sen. Grassley implies that the EB-5 program is more vulnerable to such attacks than other visa options. Ultimately, the memo concludes that the regional center program should be left to expire.

Is EB-5 more vulnerable to security concerns than other programs?

The internal memo first came to public attention with Sen. Grassley’s letter, and is highly critical of the EB-5 Regional Center program. Among its most notable claims are the assertions that the EB-5 program is vulnerable to fraud and use by terrorists and foreign government agents. It also asserts that participants’ backgrounds cannot be verified. Overall, the memo claims that other permanent residency classifications provide more checks against security concerns. Specifically, it states that other employment-based classifications “require proof of education and/or experience, while family-based visas require positively demonstrating bona-fide relationships,” and the EB-5 program does not require this. The memo mentions the legal source of funds requirements of EB-5 in passing, but discounts the stringent requirements as being too hard to verify.

The regional center program

The memo also targets regional centers specifically. It asserts, inter alia, that “indirect job growth is problematic,” and that not “having to provide evidence of jobs created” creates an “opportunity for fraud.” Both of these assertions need further analysis—especially the former assertion, because neither I nor the team that wrote the memo are economists.

The latter statement regarding fraud seems somewhat untrue. When using economic analysis to show job creation, the models and the inputs are clear. For example, the RIMS II model uses multipliers to calculate job creation, and the inputs are actual expenditures or actual revenues. In such a case, the only opportunity area for fraud lies in misstating expenditures or revenues. A simple solution is to require audited statements. However, applications are currently submitted under the penalty of perjury, which is typically considered sufficient to keep professionals and business owners honest.

Misguided recommendations

Based on its observations about the EB-5 program, the memo makes some recommendations that do not address the core issues.

The memo first recommends raising the required minimum investment amount and claims this will make fraud more in- convenient. However, those committing fraud or other illegal activity often have access to such resources, and simply raising the investment amount does not rectify the issue. If the authors are concerned about combating fraud, they might suggest putting measures in place to prevent fraud at all investment levels.

The second recommendation suggests that investors be actively involved in the day-to-day operations of the business in which they invested. This recommendation is said to “provide a heightened degree of certainty regarding the intentions of the alien applicant.” It has long been accepted in the industry that the intent of the majority of EB-5 investors is immigration to the United States, while minimizing the risk of losing their capital; the memo is calling for a day-to-day role in the business to be the investor’s primary motivation. I am unsure as to how this requirement would improve the program; the intent behind the investment does not affect the profound benefit that it provides the American people. If Sen. Grassley and the DHS are concerned about the benefits of the EB-5 program under the current regional center program, they only need to look to David Kay’s peer-reviewed impact study commissioned by The Association to Invest in the USA. In the study, Kay, of IMPLAN Group, LLC, demonstrates that spending associated with EB-5 investors supports over 16,000 U.S. jobs each year and contributes $1.3 billion to U.S. GDP. Additionally, investor spending adds $713 million in federal tax revenue, annually, and $109 million in state and local tax revenue.

The information required to show a legitimate source of funds for the EB-5 visa, under 8 CFR 204.6(j)(3), includes, among other items: foreign business registration records; corporate, partnership, and personal tax returns, including income, franchise, property (whether real, personal, or intangible), or any other tax returns of any kind filed within five years, with any taxing jurisdiction in or outside the United States by or on behalf of the petitioner; and evidence identifying any other source(s) of capital (emphasis added). It would appear that requiring five years of personal tax returns would provide a substantial amount of information to be “researched, vetted, or cross-checked.”

Illegitimate activity exists in all visa classifications—just as illegitimate activity exists in all sectors—but the idea that the EB-5 program is more vulnerable to abuse remains unfounded. The memo suggests that there is “greater information” in the other categories that can be “researched, vetted, or cross- checked.” That assertion is simply inaccurate, as many employment classifications only require little or no experience, or just a university degree. Clearly, there would be little information to be “researched, vetted, or cross-checked” in such classifications.

The argument misses the point and highlights the issue. If the United States aims to guarantee the safety of its citizens— one of the primary purposes of government—it should focus on developing a system to perform background checks on all visitors and immigrants, rather than shutting down a beneficial program and sweeping legitimate security concerns, ones that apply just as equally to other visas, under the rug.

Lastly, allowing only direct and indirect jobs created within the geographical boundaries of the targeted employment area (TEA) is misguided on two levels. First, it assumes that induced jobs should not count toward job creation—as if those jobs do not exist. This debate should be left to economists—not to attorneys and immigration officers. What I do know is that the econometric models used to measure induced jobs are standard for use by economic development professionals and policymakers to measure or forecast the economic impact that will result from a project. Furthermore, such a policy does not give credit for jobs created outside the TEA. If your child were hired by a supplier outside the TEA because of a project located in the TEA, I am quite sure s/he would not care where the employer is located.

Balancing the benefits of EB-5 with security concerns

EB-5 is, at its core, a job creation program that encourages foreign entrepreneurs to invest in the United States. Instead of discouraging them, we should welcome them with open arms. They don’t take jobs. They create them—at no cost to the taxpayer. In my experience, they go to restaurants and often spend money more than the middle class. They buy homes that cost more, and thus pay more property taxes. They hire housekeepers, lawn maintenance companies, and more, creating an overwhelming impact.

The recent debate misses the point. Bad people do bad things. EB-5 by itself does no more harm than a gun locked up. But, put a gun in the hands of bad people and tragedies occur. Student visas were issued to some of the terrorists that attacked the United States on September 11; that does not mean that all students are terrorists. Solyndra went out of business; that does not mean that the U.S. Department of Energy should not make loans to companies looking to minimize dependence on fossil fuels—see Tesla. Bernie Madoff stole billions; that does not mean that people should not invest.

Rather, these examples show the necessity of proper regulations to protect U.S. citizens, while allowing them to benefit from good programs. The memo’s observations and recommendations show a disregard for the facts of the EB-5 program and its immense benefits. Instead of following the recommendations set out in the memo, USCIS should seek input from professionals in the EB-5 space to assist in the informed promulgation of policies and procedures, so that foreign nationals can be properly “researched, vetted, or cross-checked” to ensure the safety of the U.S. people.

Jeffrey E Campion

Jeff Campion is an immigration attorney who works with high net worth individuals and their immigration structuring in the United States. He also represents regional centers in formation, as well as in project compliance. He is a principal of the Texas Urban Triangle Regional Center, LLC and the Gulf States Regional Center, LLC. He can be reached at jcampion@campionlaw.com.

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